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Tuesday, December 20, 2016

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, delivered a Commencement Address at the University of Baltimore's 2016 mid-year commencement. The first half of her address was focused entirely on the job prospects of recent graduates as they attempt to break into their chosen careers. Commencement addresses, by their very nature, are extremely optimistic, and Ms. Yellen's was no exception. Unfortunately, reality is much closer to Thornton Mellon's view than Janet Yellen's. (You may remember that classic commencement address in "Back to School" in which Mellon advises the class, "It’s a jungle out there. You gotta look out for number one. But don’t step in number two. And so, to all you graduates, as you go out into the world, my advice to you is … Don’t go! It’s rough out there! Stay in school!")

Ms. Yellen opened her address by telling the graduates, "I believe,
for two reasons, that the job prospects and career opportunities for new
graduates at this time are very good. First, after years of a slow economic recovery, you are
entering the strongest job market in nearly a decade. The unemployment rate, at
4.6 percent, is near what it was before the recession."

Followers of this blog are already aware of how little respect I have for that U-3 figure of 4.6%. Rather, the number on which I place the most significance is the Labor Force Participation Rate which is currently sitting at a dismal 62.7%. The current rate is en par with the levels last seen in 1978 and those levels tell us nearly 95 million Americans are out of work. It's a far cry from the rosy picture painted by that 4.6% U-3 number. Worse yet, it's not improving.

There are numerous causes for the decline that we've experienced since the turn of the century, however recession isn't one of them. Look at the strong upward slope of that chart right through 1990. While the labor force participation was improving dramatically, we experienced three recessions.

1973 to 1975. GDP: -3.2%

1980. GDP: -2.7%

1990 to 1991. GDP: -1.1%

According to the Fed Chair, the layoff rate is low and job openings are up over the past couple of years. That, however, is at odds with what we're seeing in the workforce, especially in the higher paid fields. The "job openings" statements are especially troubling since they only consider whether or not a company is hiring. What they do not consider is where they are hiring and if those hires will be Americans or will come from the hoards of H1b visa holders that are flooding the US job market at the expense of Americans that are routinely put out of work.

Lest their be any doubt that Americans are not being hired for high paid positions, take a look at the 2016 Green Card Report listed by job title. The 2016 H1b Visa Report tells an equally dismal story. The bottom line is, if you're considering a career in technology, you're living in the wrong country. The opportunities for any highly skilled software developer in the US are dwindling fast, and that is not likely to change in the time it will take for anyone currently in the school system to see any benefit.In fact, those prospects will get decidedly worse before they get better. The latest craze whenever business leaders talk about technology is "cloud computing." Few of them know what it means or why they want it, but you can bet that "moving to the cloud" is in everyone's road map. Of course, the fine print on those cloud services is all too often ignored until it's too late, but it will be a decade or more before businesses learn that they've been duped and the cloud solutions have cost them far more than any perceived realized benefits. In the meantime, that move towards Software as a Service (Saas), Infrastructure as a Service (IaaS), or any of the other "as a Service" offerings with which companies are being inundated today will continue to drain the industry of skilled technology jobs. Well, at least in the US. India, on the other hand, is the prime benefactor. The number of foreign applicants coming from India outnumber their nearest competitor (China) 7 to 1. As I said, if you want a career in technology, you're living in the wrong country."But we are quite certain that a college diploma or an advanced degree is a key to economic success.Those with a college degree are more likely to find a job, keep a job,have higher job satisfaction, and earn a higher salary."

She's correct in the need for a college degree, although not necessarily for the reasons she mentions or for the reasons graduates may think. A college undergraduate degree has one purpose: assist you in procuring your first job in a career field. Once that job is secured, the rest is up to you. The Fed Chair correctly notes that the need for a college degree is higher than ever. What she did not mention, however, is the reason for that, and it has little to do with the complexity of today's jobs.

Obtaining less than a 4-year college degree has become too easy and, as a result, its value has diminished. When I entered the workforce, the level of education that was the differentiator was a 2-year Associate's Degree. Prior to that, it was a high school diploma. Today, it's a 4-year Bachelor's Degree. The dirty little secret is that the differentiator will always be the level of education that weeds out the vast majority of potential applicants. The degree is not so much a job requirement as it is a method of reducing the number of resumes to a manageable level.

That, in fact, is my primary reason for opposing free college education programs. By increasing the number of 4-year degrees on the market, all that will be accomplished is to raise the minimum requirement one level higher, to a master's degree. The net number of people eligible for a position will not change, despite an increase in the number that have a fancy undergraduate diploma that has suddenly become worthless.

Ms. Yellen briefly touched on student debt, however she didn't go far enough nor offer any advice beyond a subtle hint that it's okay to take on that debt. She couldn't be more wrong in that regard. The best advice I've read recently is to not incur more total student loan debt than you can reasonably expect to earn in your first year after graduation. What solid advice! The fact is, education has grown absurdly expensive, and the primary reason it has grown out of proportion is the ease with which students are able to obtain loans. The supply and demand dynamic that should result in the price of an education no longer applies, and as a result, the cost is allowed to skyrocket out of control. With the exception of very few professions, there's no justification for it. What's important is the degree itself, not the name of the college on that degree (again, with very few exceptions.) All that diploma is doing is getting you into the job interview. How you conduct yourself at that point is what determines if you get the job. Yes, the cost of education is absurd, today, and it must be fixed. The solutions, however, do not include transferring the cost away from the student and onto the taxpayer since that simply skews the supply and demand equation even further.

Finally, the major problems today's students will face in the workforce are coming from globalization and increased automation. The Fed Chair stated, Like technological change, globalization has reinforced the shift away from lower-skilled jobs that require less education to higher-skilled jobs that require college and advanced degrees.

What she neglected to mention is that the purpose of increased automation is not to simply increase the productivity of the workforce. Rather, it's purpose is to completely eliminate the workforce. It is not just low-income unskilled jobs that are being eliminated. It includes highly skilled high wage jobs. Again, this is seen daily in the technology fields where automation and offshoring are the daily mantras. Where "institutional knowledge" was once considered a key asset, it is today considered a major liability that inhibits the misconception that technology resources are interchangeable commodities that can be sourced elsewhere for a fraction of US labor costs.

So yes, I do believe Ms. Yellen painted an overly optimistic of job prospects to yesterday's graduates. They face the worst job prospects I've seen in my lifetime, and they are likely to worsen over the coming decade. Until "globalization" becomes a dirty word, the American worker will consistently lose to their foreign counterparts in countries without decent wage standards, environmental protections, or industry regulations. Unfortunately, as the American worker finds it increasingly difficult to establish a career in a high paying field, that standard of living Ms. Yellen touted will begin to decline. The point of equilibrium in this new world of "globalization" is not a point at which most Americans will want to live. Without a bit of protectionism inserted into a world view, however, that decline is inevitable.